The Best Stock to Own

Do you have a very best stock? A stock that brings you closer to retirement year in and year out? One like Kraft, formerly American Dairy Products, which -- as tracked back by Dr. Jeremy Siegel -- turned $1,000 into more than $2 million over 53 years with dividend reinvestment? In terms of returns, Kraft has quite literally been one of the very best stocks of the past half-century.

I pay special attention to this stuff: My job is to find companies with the same magic that's made Kraft such a dynamite stock.

A repeatable fortuneWhat's the secret of Kraft's phenomenal digits? Well-branded products that a lot of people use, for starters. While that may be the bulk of it, those products aren't its only source of juju. The rest comes from two magic words: dividend reinvestment.

Don't think these words are powerful? Take a ho-hum stock -- or at least one that appears that way -- paying 5% in dividends yearly and racking up a modest 5% in capital appreciation. Start with $1,000, and reinvest those dividends. After 30 years, you'll have amassed a whopping $18,700!

The other side of the coin is that you could get those returns -- or better -- from a strong growth stock, but the dividend stock above gives you the flexibility to switch from reinvestment to an income strategy. In that example, you'd get almost $900 a year. Besides, which one do you think is the safer bet?

A few ideas for youPaying dividends to shareholders also forces companies to exercise fiscal discipline. That's great, because being flush with cash tempts managers -- let's face it, they tend to have big egos -- to bungle their loads. And even if they don't slip up, they tend to hoard that cash away from shareholders without putting it to any use.

In a way, dividends encourage responsibility -- something that strikes a personal nerve with me. As co-advisor of The Motley Fool's dividend investing service, Income Investor, I'm always on the lookout for corporations paying solid dividends, like the stocks I'll share with you now.

Like Kraft, Procter & Gamble (NYSE: PG) has an enormous portfolio of well-branded products that a lot of people use. Its brands include Pringles, Crest, Duracell, and Bounty. At 2.6%, its yield isn't enormous, but its ability to generate free cash flow is quite impressive.

Speaking of companies with strong brands, I'm taking a hard look at Mattel, which manufactures a portfolio of iconic toys, including Barbie, Hot Wheels, Fisher-Price, and Matchbox. The stock has been beaten down significantly in the past eight months -- even more so than competitor Hasbro (NYSE: HAS) . But I believe brighter days lie ahead, as the company helps roll out products in partnership with DreamWorks Animation's (NYSE: DWA) monster Kung Fu Panda movie and the upcoming Dark Knight Batman film. The 4.2% dividend yield should make the wait that much easier.

But you needn't limit yourself to the world of consumer staples if you're thirsty for some action. Examine Cellcom Israel (NYSE: CEL) , a big name in the fast-growing Israeli cellular market. Sporting a $3 billion market cap, the company certainly is no Sprint Nextel (NYSE: S) yet. But with a 9% annual dividend yield, you can really afford to wait while the Israeli market matures.

The Foolish bottom lineThese stocks aren't perfect for everyone -- they're just ideas to jump-start your research. The best stock for you might not be the best for another reader. The bottom line is that in seeking great stocks for your portfolio, I invite you to give a close look to dividend stocks. They're appropriate for just about everybody. They're closet performers, and they tend to do their jobs more safely than others.

Looking for more stock ideas? Income Investor is beating the market by more than seven percentage points -- and I'm offering a free guest pass. Simply click here to learn more.

This article was originally published Nov. 14, 2006. It has been updated.

James Earlydoes not own shares of any company mentioned in this article. Microsoft and Sprint are Inside Value picks. Kraft is an Income Investor recommendation. Hasbro and DreamWorks Animation are Stock Advisor selections. The Motley Fool has a disclosure policy.

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When I reinvest a dividend it means I have elected NOT to receive a cash payment of, say $100. But I know I will be taxed on that $100 at about $35.

Had I not reinvested that dividend, I would have received the $100 and paid the $35 tax. I probably would have only considered the $65 difference as investable funds (and might not even have invested that!)

So reinvesting dividends not only creates discipline in the investment of free cash, it also INCREASES the amount likely to be invested in total (by the amount of the tax paid from other funds).

I like to hold the divy for a day or two or ten, for things to settle a bit and then add up all my little divies and purchase something dfferent! just to keep things interesting, unless of course I just reinvest to save the commish!!

My dad has several of these types of stocks. One is Walgreens (WAG). He was a pharmacist and owned an independent drug store. In the 50's he became a Walgreen franchisee (that's right they once had franchises) and he bought 1,000 shares of their stock for around $10 a share.

After it split the first time in 1963, he sold half his shares. Since then he has kept the remainder, except for the many gifts he has made of shares to his family and children.

The 500 original shares that he kept, had he not given any away over the years, would now be 256,000 shares after nine 2:1 splits. The current market value would be $7 million. That doesn't include the accumulated dividends.

You only have to buy and hold the right company once in your life. All the other investing mistakes become meaningless when compared with a real winner.

All of these statements are true, and this has been my own investment strategy -- but there is a but, and it shouldn't be taken lightly.\

1) One of the comments discusses taxes, and this can be a major factor in stock selection. If you take the dividends and reinvest them, you're paying taxes without having the cash to pay with. That means you're straining your other sources of income. Hopefully you have enough so this is no problem -- but it can be over time. With a growth stock, the money that would have been taxable income prior to reinvestment becomes, in effect, tax deferred (in either case you're dependent on efficient management).

2) In a related manner, tax laws come and go, which adds another wrinkle to stock selection. Years ago, dividends from private utilities were partiaully exempted in order to encourage investment in these companies. That didn't last. Current tax laws favor dividends over other forms of income, but with federal deficits, can these advantages be relied on?

3) How many companies have had a favorable run for as long as Kraft? Not GM or GE, both of which had reliable dividends at one time. There was a time when AT&T was the quintressential widows and orphans stock, but that was before the court ordered divestiture, before the managers misread the future, before Armstrong overpaid for every cable TV company. Any investment strategy can show examples of dramatic gains (buy and hold Apple during the years before the second coming.) No strategy is an alternative to paying attention.

Kraft, as a separate company wasn't in existance from the time it was bought by Philip Morris, now Altria, until a year or so ago when it was spun off. During that time, the high dividend rate was due to the high earnings from the tobacco business of Philip Morris.

How many of Kraft's owners would have been comfortable owning a tobacco company? Not that a lot of Kraft products aren't just about as heart unhealthy as tobacco.

I'm 80 and I Started a roth ira 3 yrars ago. Now i my earned jncome is quite low, less than $5000/yr buit I have doubled my portfollio w/3 stocks. F,F-A and KFT.. I will rollover some of my traditional IRA to the rothj. It will bve in the form of shares, N ot my mesabi,. it will be a cheaper stock. Incedently I sold 2 covered s on MSB for 45.my base was 7.88

i would like to see how the person who wrote this artice came to "turned $1,000 into more than $2 million over 53 years with dividend reinvestment" because i have intestest calc. forumals and apps and none of my numbers come even close to this amounts? what was the price per share, dividend yield, etc.

James: I was interested in CEL for the dividend but checked with a friend in Haifa Israel first. He said that the country is allowing a lot more competitors into the market and he felt the dividend was not secure.

I like closed end funds the best such as (BHY) and (KHI). (BHY) yields 7.25% and (KHI) yields 9.2% annually. Both pay monthly dividends I like TrustCo Bank because it has a lofty dividend of 5.2% and the bank never took federal money and does NOT engage in the bad borrowing practices such as the others have done so.My investing motto, " I don't play with my hard earned money, I invest it wisely" Have a nice day everyone!

I agree that an investor should focus on dividend stocks. In that way, you can figure out how it will benefit us as an investor. It is definitely one of the ways to investigate our prospect company. It will tell us how that company runs for a year, 3 years or 8 years.

I am 30. I own a good small business that provides me with income I've never seen before, and my hubs has a good job elsewhere that provides our family of 5 with good insurance. We have used nothing but savings accounts to try to save for our future, but are bombarded by other family that always "needs help". Case in point, I inherited some common stock that has done really well over the years, and would like to invest our extra cash that is in savings, but dont know the best way to do so for me. Any one have any tips for a mom that wants to make some smart investments. I've heard about Roths and Drips, and Dividend Stocks that can be reivested, but dont know where to start. Any ideas on a frugal and newbie to start investing money?

Further to what joannemary said, Go to Bank of New York Melon's website, look for a tab that says "Investment Services". Scroll down to "Share owner Services" and click on it. A window should open up which says "Computershare Investor center". About halfway down the page, you'll find a section relating to buying shares of companies that have a Direct share buying program. Click on the "all plans" line which will take you to a full list of all American companies that have a direct share buying and dividend re-investment program. You have to buy one (1) share in order to participate in that companies share purchase program. You can set up a program through BNY Mellon. I believe they have a program which allows you to buy a company's stock through a regular deposit account withdrawal. You give them your account number and the name or names of the companies you want to invest in and they will take whatever amount you tell them to buy your chosen companies stock! If you don't want to use BNY, go to a Discount Stock Broker. You won't get any advise on what to buy, but you will get cheap buying and selling fees after you have some money in your account. My broker requires $50,000.00 in account value to get the low trading fees. Other brokers may require less. You need to research that.

Hope all that helps! One last thing, start reading!!! While the babies are napping, start reading books by the following authors:

Ben Graham, Warren Buffet, John Bogle, William Berstein, Peter Lynch, any of the "Little Book of" series of books, Phillip Fisher, Any books recommended by the Motley Fool and I believe they have a few hundred or so books to recommend, Go to your local Library and see if they have a subscription to the "Value Line" newsletter. Get busy reading, cuz your schooling has only just begun!

Sorry, I missed a step!! After clicking on Share owner services, a window opens that asks you to click on either an Employee Stock Purchase Plan or as a Registered Shareholder. Click on the Registered shareholder and choose Equity Holding. This now brings you to the Computershare Investor Center. Scroll down to the bottom of the page and click on the "Buy stock Direct " banner. which should then take you to the page that i talked about earlier! Sorry for the mix up!

Initially sucked in by the MF SWIR advertisement etc. etc. and then did the MF 9 best div stocks run..................Patience not being the virtue at the time (newly semi-retarded {my words} retired). Didn't like the trends or returns.

Reverted back to my 90's days (rock and roll you could not go wrong to make money on the market especially Nas......note; I was VERY lucky by chance I got out before the dot com crash) in investing back end of 2013 and early 2014 and saw some action I liked, but was flying fairly uninformed and portfolio was a major see-saw!!!

Smacked my head (more than once!! aka NCIS) and decided to actually read my MF subsciptions as well as others advice/commentary on the web etc. to try and inform myself and form a serious portfolio.

Must admit it wasn't easy (to restrain the trade itch), but only a few months later I am happily collecting divs on my growth/value picks and am ahead of the market by a few points.

Nice to see 20 out of 24 in the green for a change.

I'm not gonna lie, but I recently took some profits by cutting stock ownership %'s (still own all same stocks etc.) to a) be a little defensive b} build up some cash in case of correction for redeployment.

All cash proceeds plus another potential 3rd quarter addition remains in portfolio for re-buy or new buy due to above.

My lesson for ME - pick a base of div/growth, and value stocks or even ETFs and look/research MF's SA/RB/SN recs amongst others.

Best advice I can give (I am NOT an expert) - buy good companies that pay a div and you believe they can grow it.